Reacting to news that China’s economy has fallen into deflation, American President Joe Biden last week declared the country to be “a ticking time bomb” under the global economic and security apparatus. Pointing to Beijing’s weak growth figures, high levels of unemployment, and ageing workforce, Biden said that “China is in trouble.”
Figures released by the National Bureau of Statistics of China (NBS) showed that the consumer price index, the country’s main gauge of inflation, fell by 0.3% in July. Factory gate prices continued to decline, having fallen by 5.4% in June, the fastest rate of depreciation in over seven years. These concerning numbers come amid a sluggish post-Covid recovery that has raised fears China is entering an era of declining prices, stagnating wages, and low demand for consumer and industrial goods.
But what does deflation and economic instability in Africa’s biggest export market mean for the continent? Could Africa also be “in trouble?”
Carl Mbao, managing partner at Frontier Capital Partners in Lusaka, is concerned about the impact Chinese deflation could have on the country’s demand for African commodities, particularly copper. In 2021, Zambia sold $1.64bn worth of copper to China – with the commodity making up 70% of the country’s total exports. In Mbao’s words, Zambia is therefore “hugely exposed” to Chinese demand for its commodities.
Some African neighbours are even more exposed. The Democratic Republic of the Congo (DRC) sends almost half of its exports to mainland China. Over 90% of the DRC’s exports consist of just five commodities: refined copper and unwrought alloys, cobalt, unrefined copper, copper ores or concentrates, and crude oil. Weaker demand from China, and depressed prices on global markets, would likely lead to a significant drop in exporting activity and revenue.
Commodity prices have already posted declines on global markets in response to China’s deflation news, even though the trend will take at least a few months to feed into real demand. At time of writing, the NASDAQ copper index had declined over 7% in August alone as China’s economic woes stifle prices. Brent crude also fell by 1.3% in the immediate aftermath of the news.
Mbao notes that the potential implications, both for Zambia and other African commodity exporters, go further than a simple (if worrying) drop in revenue for exporters. “Copper is our single largest source of foreign exchange – so from a budget perspective, it’s critical for Zambia,” Mbao tells African Business.
“With less forex coming in, could that impact our ability to service dollar-denominated debt?” Mbao also asks. “China is Zambia’s largest bilateral creditor. Their view on their own macroeconomic environment probably affects how they’re thinking about debt restructuring conversations.”
“An environment of rising interest rates in the States has its own effects on capital markets, but when you combine that with softer growth and productivity in China, all this could encourage less “concessionary” stances around things like debt,” Mbao adds.
Not all bad news
However, it is not all necessarily bad news for Africa. Max Walter, senior industrial policy advisor at the Tony Blair Institute for Global Change in Nairobi, says that “we shouldn’t jump to too many conclusions based on one month’s consumer index figures.”
“Some analysis suggests that the decline in prices in China is temporary,” Walter notes. “Last year was a somewhat skewed year because the global economy and the Chinese economy are coming out of Covid. We’ll have to wait and see if there are longer-term shifts happening.”
While recognising the implications of China’s deflation on African commodity exporters, he also argues that this must be balanced against the potential upsides. Walter points out that a weaker Chinese yuan (CNY) – which plunged to a fourteen year low after the consumer price index figures were released – has a number of benefits. While the vast majority of African debt is denominated in dollars, that which is priced in CNY is likely to become easier to service.
“Of course, if commodity prices go down and if Chinese demand for African commodities reduces, that could make it more difficult to repay existing loans, but on the other hand, if the Chinese currency becomes weaker, yuan-denominated debt becomes cheaper to repay,”